Fund gains largely offset 2008’s losses

The nine-month upward trend on global the stock markets may have dominated business headlines in late 2009, the growth since March has yet to erase the losses of 2008 for most equity-focused mutual funds, according to data from Morningstar Canada.

Returns for 2009 were positive for almost all of the equity or balanced fund indices that Morningstar tracks, with the Japanese Equity Fund Index being the sole exception.

The best returns came from the Precious Metals Equity Fund Index, which posted a 57.9% gain on the back of the soaring price of bullion. The Canadian Focused Small/Mid Cap Equity Fund Index returned 55.9%, thanks in large part to that sector’s large exposure to resource stocks.

The Natural Resources Equity Fund Index was not far behind, with a gain of 55.1%. The Emerging Markets Equity group gained 53.3%, edging out the Canadian Small/Mid Cap Equity Fund Index, which climbed 52.5%.

The out-performance of resource stocks and emerging market investments was no coincidence.

“The strong rebound in natural resource equities last year was a reflection of several developments, including the stockpiling of many key base metals by China, prospective improvements in production growth and demand for energy, and the start of a recovery in G7 nations,” said Nick Dedes, fund analyst for Morningstar Canada.

“As investors get increasingly comfortable with holding riskier assets amid improving credit conditions and economic prospects, smaller capitalization equities — particularly in the energy and resource sectors — have gained noticeable traction.”

Rising global prices for commodities drove the Canadian dollar higher over the course of 2009, offsetting the gains made on many foreign markets. Massive returns throughout Asia, like the 78.3% gain in Taiwan or the 80% gain on the Shanghai stock benchmark, were slashed.

That still left the Morningstar Greater China Equity Fund Index with a gain of 38.6% for the year, while the Morningstar Asia Pacific ex-Japan Equity Fund Index earned 36.3%.

In the U.S., the S&P 500 gained 26.5% on the year, but the 17% appreciation of the Canadian dollar against the greenback left the U.S. Equity Fund Index with a return of 10.7%.

“Not surprisingly, the greenback came under significant pressure last year as tremendous amounts of government stimulus spending added to the ballooning U.S. budget deficit,” Dedes said. “It appears that this weight may remain for some time, though we’ve seen instances of short-term strength and a flight to U.S. Treasuries at the height of the credit crisis.”

Japan provides the most vivid example, as the benchmark Nikkei 225 index rose 19% on the year. But the surging loonie wiped out all of these gains, leaving the Japanese Equity category with a -9.7% return on the year.

“This dragged the category deep into negative territory, with the Morningstar Japanese Equity Fund Index posting a 9.7% loss,” Dedes said. “Also, most of the Nikkei’s gains came in December following the Bank of Japan’s decision to apply further quantitative easing.”

Only one other fund category posted a negative full-year return, as Global Fixed Income dropped 3.2%.

Balanced funds, which have been immensely popular with investors throughout 2009, also rode the stock markets higher, with Global Fixed Income Balanced and Canadian Fixed Income Balanced fund indices gaining 18.9% and 17.7%, respectively. That was enough to boost to their pre-market crash highs.

(01/05/10)